System and method for managing trading orders received from market makers

ABSTRACT

According to one embodiment, a method of managing trading is provided. A first offer for a particular instrument in a particular market is received from a first market maker at a first offer price. A first bid for the same particular instrument in the same particular market is received from a second market maker at a first bid price, the first bid price being higher than or equal to the first offer price. As a result of the first bid price being higher than or equal to the first offer price, the first offer price is automatically increased to a price higher than the first bid price such that a trade is not executed between the first offer and the first bid. In some embodiments, such method may be used to protect market makers from unwanted trades caused by inherent latency in the market makers&#39; pricing engines and/or networks.

CROSS REFERENCE TO RELATED APPLICATIONS

This application is a continuation of U.S. patent application Ser. No.10/895,668, filed Jul. 21, 2004, which is hereby incorporated byreference herein in its entirety.

TECHNICAL FIELD OF THE INVENTION

This invention relates in general to trading markets and, moreparticularly, to a system and method for managing the trading ordersreceived from market makers in a trading market.

BACKGROUND OF THE INVENTION

In recent years, electronic trading systems have gained a widespreadacceptance for trading items. For example, electronic trading systemshave been created which facilitate the trading of financial instrumentssuch as stocks, bonds, currency, futures, or other suitable financialinstruments.

Many of these electronic trading systems use a bid/offer process inwhich bids and offers are submitted to the systems by a passive sidethen those bids and offers are hit and lifted (or taken) by anaggressive side. For example, a passive trader may submit a “bid” to buya particular number of 30 year U.S. Treasury Bonds at a given price. Inresponse to such a bid, an aggressive trader may submit a “hit” in orderto indicate a willingness to sell bonds to the first trader at the givenprice. Alternatively, a passive side trader may submit an “offer” tosell a particular number of the bonds at the given price, and then theaggressive side trader may submit a “lift” (or “take”) in response tothe offer to indicate a willingness to buy bonds from the passive sidetrader at the given price. In such trading systems, the bid, the offer,the hit, and the lift (or take) may be collectively known as “orders.”Thus, when a trader submits a bit, the trader is said to be submittingan order.

In many trading systems or markets, such as the NASDAQ or NYSE, forexample, trading orders may be placed by both market makers and traders,or customers. A market maker is a firm, such as a brokerage or bank,that maintains a firm bid and ask (i.e., offer) price in a givensecurity by standing ready, willing, and able to buy or sell at publiclyquoted prices (which is called making a market). These firms display bidand offer prices for specific numbers of specific securities, and ifthese prices are met, they will immediately buy for or sell from theirown accounts. A trader, or customer, is any entity other than a marketmaker which submits orders to a trading system.

For a “cash” price style instrument (i.e., an instrument for which thebid price is typically numerically lower than the offer price), when theprice of a newly placed (aggressive) bid is greater than the price of anexisting (passive) offer, a “crossed market” is created, and the bid maybe referred to as a crossing bid. Similarly, when the price of newlyplaced (aggressive) offer is lower than the price of an existing(passive) bid, a crossed market is also created, and the offer may bereferred to as a crossing offer. In many trading systems, when a bid andan offer lock (i.e., match each other) or cross, a trade isautomatically executed at the price most favorable to the aggressive(i.e., the second submitted) order. For example, if a first market makersubmits a bid at a price of 15, and a second market maker submits anoffer of 14, a cross market is created and a trade is executed at theprice of 15, which can often be a more most favorable price for thesecond market maker, such as where the first market maker was about tocancel his price. These systems may operate with little or no regard tothe market maker committing capital to create a two-way bid and offermarket price. Such market makers may have latency in their systems whichmay create slightly stale markets, whereby a market maker's existingprice can be traded by a new market maker price that reflects a morerecent market environment. In some instances, the difference may bemerely milliseconds or some other very small period of time, but in afast moving and liquid market, market makers may experience losses duethe inherent latency of the relevant system.

SUMMARY OF THE INVENTION

In accordance with the present invention, systems and methods formanaging trading orders received from market makers in a trading marketare provided.

According to one embodiment, a method of managing trading is provided. Afirst offer for a first instrument is received from a first market makerat a first offer price. A first bid for the first instrument is receivedfrom a second market maker at a first bid price, the first bid pricebeing higher than or equal to the first offer price. As a result of thefirst bid price being higher than or equal to the first offer price, thefirst offer price is automatically increased to a price higher than thefirst bid price such that a trade is not executed between the firstoffer and the first bid.

According to another embodiment, another method of managing trading isprovided. A first bid for a first instrument is received from a firstmarket maker at a first bid price. A first offer for the firstinstrument is received from a second market maker at a first offerprice, the first offer price being lower than or equal to the first bidprice. As a result of the first offer price being lower than or equal tothe first bid price, the first bid price is automatically decreased to aprice lower than the first offer price such that a trade is not executedbetween the first offer and the first bid.

According to yet another embodiment, another method of managing tradingis provided. A first offer having a first offer price is received from afirst market maker in a first category of market makers. A first bidhaving a first bid price is received from a second market maker in asecond category of market makers, the first bid price being higher thanor equal to the first offer price such that the first offer and firstbid are either matching or crossing. If the first bid was passive andmatched or crossed by the first offer, a trade is automatically executedbetween the first bid and the first offer. If the first offer waspassive and matched or crossed by the first bid, a trade is notautomatically executed between the first bid and the first offer.

According to still another embodiment, a method of managing trading isprovided. A first bid for a first instrument is received from a firstmarket maker at a first bid price. A first offer for the firstinstrument is received from a second market maker at a first offerprice, the first offer price being lower than the first bid price. As aresult of the first offer price being lower than the first bid price,the first bid price is automatically decreased to match the first offerprice, and a first timer having a predetermined duration is started. Ifthe first timer expires and both the first bid and the first offer existat the first offer price when the first timer expires, a trade betweenthe first bid and the first offer is automatically executed.

According to still another embodiment, another method of managingtrading is provided. A first offer for a first instrument is receivedfrom a first market maker at a first offer price. A first bid for thefirst instrument is received from a second market maker at a first bidprice, the first bid price being higher than the first offer price. As aresult of the first bid price being higher than the first offer price,the first offer price is automatically increased to match the first bidprice, and a first timer having a predetermined duration is started. Ifthe first timer expires and both the first offer and the first bid existat the first bid price when the first timer expires, a trade between thefirst offer and the first bid is automatically executed.

According to still another embodiment, a system for managing trading isprovided. The system includes is a computer system having a processor,and a computer readable medium coupled to the computer system. Thecomputer readable medium includes a program. When executed by theprocessor, the program is operable to receive a first bid for a firstinstrument from a first market maker at a first bid price; receive afirst offer for the first instrument from a second market maker at afirst offer price, the first offer price being lower than the first bidprice; as a result of the first offer price being lower than the firstbid price, automatically decrease the first bid price to match the firstoffer price; start a first timer having a predetermined duration; and ifthe first timer expires and both the first bid and the first offer existat the first offer price when the first timer expires, automaticallyexecute a trade between the first bid and the first offer.

Various embodiments of the present invention may benefit from numerousadvantages. It should be noted that one or more embodiments may benefitfrom some, none, or all of the advantages discussed below.

One advantage of the invention is that in some embodiments, a tradingsystem is provided in which a locked or crossed market between twomarket makers does not automatically trigger the execution of a tradebetween the two market makers. In some embodiments, a cross timer isstarted during which the market maker that submitted the first order(the passive order) may withdraw or move their bid or offer in order toavoid an automatically executed trade with the other market maker. Thismay be advantageous to market makers who desire some delay time in orderto decide whether to avoid automatically executed trade with subsequentorders from other market makers. For example, in a market which receivestwo or more separate electronic feeds from market makers and/orcustomers, market makers may wish to have some time to update their bidand/or offer prices to keep up with the current market or orders fromother market makers. In other embodiments, the trading system mayautomatically move the price of the first order (the passive order) outof the way of the second order (the aggressive order) to avoid a lockedor crossed market between the two market makers. This may beadvantageous to market makers who wish to avoid automatic trades withother market makers, and thus protect against any real or perceivedlatency in their respective pricing system's input or output.

Another advantage of the invention is that, in some embodiments, amulti-tiered system of market makers may be employed such that ordersplaced by different categories of market makers are treated differentlyby a trading system module. Thus, one category of market makers may beprotected, at least to some extent, from another category of marketmakers that may have superior information regarding one or moreinstruments or access to faster pricing engines or market data input.

Other advantages will be readily apparent to one having ordinary skillin the art from the following figures, descriptions, and claims.

BRIEF DESCRIPTION OF THE DRAWINGS

For a more complete understanding of the present invention and forfurther features and advantages, reference is now made to the followingdescription, taken in conjunction with the accompanying drawings, inwhich:

FIG. 1 illustrates an example system for managing the execution oftrades between market makers in a trading market in accordance with anembodiment of the invention;

FIG. 2 illustrates a method of handling a crossing offer received from acustomer according to one embodiment of the invention;

FIG. 3 illustrates a method of handling a crossing offer received from amarket maker assuming the bid side contains both market makers andcustomers, according to one embodiment of the invention;

FIGS. 4A-4B illustrate a method of handling a crossing offer receivedfrom a market maker assuming the bid side contains only market makers,according to one embodiment of the invention;

FIG. 5 illustrates a method of handling a crossing offer received from amarket maker by moving the crossed bid to prevent a crossed or lockedmarket according to one embodiment of the invention; and

FIG. 6 illustrates another method of handling a crossing offer receivedfrom a market maker by moving the crossed bid to prevent a crossed orlocked market according to another embodiment of the invention.

DETAILED DESCRIPTION OF THE DRAWINGS

Example embodiments of the present invention and their advantages arebest understood by referring now to FIGS. 1 through 6 of the drawings,in which like numerals refer to like parts.

In general, a trading system is provided which manages locked and/orcrossed markets between two or more market makers. For example, in someembodiments, a locked or crossed market does not automatically triggerthe execution of a trade between the two market makers. Rather, a timermay be started during which the market maker that submitted the firstorder (the passive order) may withdraw or move their bid or offer suchthat neither a locked nor crossed market exists with the second(aggressive) order, and thus a trade between the two market makers canbe avoided. In particular embodiments, when a first order from a firstmarket maker is crossed by a second order from a second market maker,the price of the first, passive order is automatically moved by thetrading system to create a locked market with the second, aggressiveorder. If this locked market still exists when the timer expires, atrade may be automatically executed between the two market makers at thelocked price, which is the price most favorable to the first, passivemarket maker. Thus, a market maker whose order is crossed by an orderfrom another market maker has a period of time in which to move itsorder to avoid a trade being automatically executed with the othermarket maker. This is advantageous to market makers who do not wanttheir orders to be automatically executed with those submitted by othermarket makers, which is particularly significant in markets whichreceive two or more separate electronic feeds from market makers and/orcustomers. Market makers supplying the system with bid and offer pricesmay wish to avoid trading with each other due to latency in theirsystems; instead, such market makers may wish to use their automaticpricing to attract non-automatic orders from other market participants,thus generating revenue from a volume of trades on each side of theirbid-offer spreads.

In other embodiments, when a first order from a first market maker iscrossed by a second order from a second market maker, the price of thefirst, passive order is automatically moved by the trading system tocreate a locked market with the second, aggressive order, but a timermay not be implemented. In such embodiments, a trade is notautomatically executed between the two market makers and the market mayremain locked until one of the market makers' orders is moved orremoved, or some other event causes the market to become unlocked. Instill other embodiments, when a first order from a first market maker iscrossed by a second order from a second market maker, the price of thefirst, passive order is automatically moved by the trading system out ofthe way of the second, aggressive order to prevent a locked or crossedmarket between the two market makers. Thus, a timer might not beimplemented in such embodiments.

In addition, in some embodiments, a multi-tiered system of market makersmay be employed such that market makers are categorized into differentlevels or tiers that affect the way in which orders placed by suchmarket makers are treated by trading module. For instance, an orderplaced by a first category of market maker that crosses a passive orderplaced by a second category of market maker may trigger an automatictrade, whereas an order placed by the second category of market makerthat crosses a passive order placed by the first category of marketmaker may not trigger an automatic trade.

FIG. 1 illustrates an example trading system 10 according to anembodiment of the present invention. As shown, system 10 may include oneor more market maker terminals 12 and one or more customer terminals 14coupled to a trading platform 18 by a communications network 20.

A market maker terminal 12 may provide a market maker 22 access toengage in trading activity via trading platform 18. A market makerterminal 12 may include a computer system and appropriate software toallow market maker 22 to engage in trading activity via trading platform18. As used in this document, the term “computer” refers to any suitabledevice operable to accept input, process the input according topredefined rules, and produce output, for example, a personal computer,workstation, network computer, wireless data port, wireless telephone,personal digital assistant, one or more processors within these or otherdevices, or any other suitable processing device. A market makerterminal 12 may include one or more human interface, such as a mouse,keyboard, or pointer, for example.

A market maker 22 may include any individual or firm that submits and/ormaintains both bid and offer orders simultaneously for the sameinstrument. For example, a market maker 22 may include an individual orfirm, such as a brokerage or bank, that maintains a firm bid and offerprice in a given security by standing ready, willing, and able to buy orsell at publicly quoted prices (which is called making a market). Thesefirms display bid and offer prices for specific numbers of specificsecurities, and if these prices are met, they will immediately buy foror sell from their own accounts. Many “over the counter” (OTC) stockshave more than one market maker. In some markets, market-makersgenerally must be ready to buy and sell at least 100 shares of a stockthey make a market in. As a result, a large order from a customer, orinvestor, may be filled by a number of market makers at potentiallydifferent prices.

In addition, in some embodiments, market makers 22 may includeindividuals, firms or other entities that are granted particularprivileges such that orders received from such individuals, firms orother entities are treated as being received from a traditional marketmaker (such as a brokerage or bank, for example). Thus, individuals,firms or other entities that are not typically categorized as marketmakers may be granted such market maker privileges and thus beconsidered as market makers 22 for the purposes of the systems andmethods discussed herein. For example, certain individuals, firms orother entities that may otherwise be treated as customers 24 may begranted privileges to be treated as market makers 22 for the purposes ofthe systems and methods discussed herein. In some embodiments,individuals, firms or other entities that typically do not submit and/orsimultaneously maintain both bid and offer orders for the sameinstrument may be granted market maker privileges and thus be consideredas market makers 22 for the purposes of the systems and methodsdiscussed herein. In other embodiments, individuals, firms or otherentities may be required to submit and/or simultaneously maintain bothbid and offer orders for particular instruments in order to beconsidered as market makers 22 for the purposes of the systems andmethods discussed herein.

In certain embodiments, individuals, firms or other entities are chargeda fee or commission or must provide other consideration in return forbeing granted market maker privileges. In addition, in some embodiments,an individual, firm or other entity may be designated as either a marketmaker 22 or a customer 24 for one or more particular instruments ortypes of instruments. For instance, an individual may pay a fee to betreated as a market maker 22 for one or more particular types ofinstruments in a market (such as particular types of instruments thatthe individual commonly trades), but may be treated as a customer 24 forother types of instruments in the marker.

In some embodiments, such as discussed below with reference to Rule #23,a multi-tiered system of market makers 22 may be employed. In suchembodiments, market makers 22 may be categorized into different levelsor tiers that affect the way in which such market makers 22 are treatedby trading module 30. Each market maker 22 may be classified accordingto one or more criteria, such as whether the market maker 22 is anelectronic feed or a human trader, and whether the market maker 22 is astrong trader, or has particular or inside information, in one or moreparticular instruments. In addition, in some embodiments, market makers22 are categorized into different levels or tiers for different tradableinstruments. For instance, a particular market maker 22 may becategorized as a first level market maker for instrument(s) for whichthat market maker 22 is a strong trader or has particular or insideinformation, and as a second level market maker for other types ofinstrument.

A customer terminal 14 may provide a customer (or investor) 24 access toengage in trading activity via trading platform 18. A customer terminal14 may include a computer system and appropriate software to allowcustomer 22 to engage in trading activity via trading platform 18. Amarket maker terminal 12 may include one or more human interface, suchas a mouse, keyboard, or pointer, for example.

A customer 24 is any entity, such as an individual, group of individualsor firm, that engages in trading activity via trading system 10 and isnot a market maker 22. For example, a customer 24 may be an individualinvestor, a group of investors, or an institutional investor. However,as discussed above, an individual, firm, or other entity that may beotherwise categorized as a customer 24 may be granted privileges to becategorized as a market maker 22 (at least with regard to one or moretypes of instruments) for the purposes of the systems and methodsdiscussed herein.

Market makers 22 and customers 24 may place various trading orders 26via trading platform 18 to trade financial instruments, such as stocksor other equity securities, bonds, mutual funds, options, futures,derivatives, and currencies, for example. Such trading orders 26 mayinclude bid (or buy) orders, ask or offer (or sell) orders, or both, andmay be any type of order which may be managed by a trading platform 18,such as market orders, limit orders, stop loss orders, day orders, openorders, GTC (“good till cancelled”) orders, “good through” orders, an“all or none” orders, or “any part” orders, for example and not by wayof limitation.

Communications network 20 is a communicative platform operable toexchange data or information between trading platform 18 and both marketmakers 22 and customers 24. Communications network 20 represents anInternet architecture in a particular embodiment of the presentinvention, which provides market makers 22 and customers 24 with theability to electronically execute trades or initiate transactions to bedelivered to an authorized exchange trading floor. Alternatively,communications network 20 could be a plain old telephone system (POTS),which market makers 22 and/or customers 24 could use to perform the sameoperations or functions. Such transactions may be assisted by a brokerassociated with trading platform 18 or manually keyed into a telephoneor other suitable electronic equipment in order to request that atransaction be executed. In other embodiments, communications system 14could be any packet data network (PDN) offering a communicationsinterface or exchange between any two nodes in system 10. Communicationsnetwork 20 may alternatively be any local area network (LAN),metropolitan area network (MAN), wide area network (WAN), wireless localarea network (WLAN), virtual private network (VPN), intranet, or anyother appropriate architecture or system that facilitates communicationsin a network or telephonic environment.

Trading platform 18 is a trading architecture that facilitates thetrading of trading orders 26. Trading platform 18 may be a computer, aserver, a management center, a single workstation, or a headquarteringoffice for any person, business, or entity that seeks to manage thetrading of trading orders 26. Accordingly, trading platform 18 mayinclude any suitable hardware, software, personnel, devices, components,elements, or objects that may be utilized or implemented to achieve theoperations and functions of an administrative body or a supervisingentity that manages or administers a trading environment.

Trading platform 18 may include a trading module 30 operable to receivetrading orders 26 from market makers 22 and customers 24 and to manageor process those trading orders 26 such that financial transactionsamong and between market makers 22 and customers 24 may be performed.Trading module 30 may have a link or a connection to a market tradingfloor, or some other suitable coupling to any suitable element thatallows for such transactions to be consummated.

As show in FIG. 1, trading module 30 may include a processing unit 32and a memory unit 34. Processing unit 32 may process data associatedwith trading orders 26 or otherwise associated with system 10, which mayinclude executing coded instructions that may in particular embodimentsbe associated with trading module 30. Memory unit 36 may store one ormore trading orders 26 received from market makers 22 and/or customers24. Memory unit 28 may also store a set of trading management rules 36.Memory unit 36 may be coupled to data processing unit 32 and may includeone or more databases and other suitable memory devices, such as one ormore random access memories (RAMs), read-only memories (ROMs), dynamicrandom access memories (DRAMs), fast cycle RAMs (FCRAMs), static RAM(SRAMs), field-programmable gate arrays (FPGAs), erasable programmableread-only memories (EPROMs), electrically erasable programmableread-only memories (EEPROMs), microcontrollers, or microprocessors.

It should be noted that the internal structure of trading module 30 maybe readily changed, modified, rearranged, or reconfigured in order toperform its intended operations. Accordingly, trading module 30 may beequipped with any suitable component, device, application specificintegrated circuit (ASIC), hardware, software, processor, algorithm,read only memory (ROM) element, random access memory (RAM) element,erasable programmable ROM (EPROM), electrically erasable programmableROM (EEPROM), or any other suitable object that is operable tofacilitate the operations of trading module 30. Considerable flexibilityis provided by the structure of trading module 30 in the context oftrading system 10. Thus, it can be easily appreciated that tradingmodule 30 could be readily provided external to trading platform 18 suchthat communications involving buyer 16 and seller 18 could still beaccommodated and handled properly.

In addition, it should be understood that the functionality provided bycommunications network 20 and/or trading module 30 may be partially orcompletely manual such that one or more humans may provide variousfunctionality associated with communications network 20 or tradingmodule 30. For example, a human agent of trading platform 18 may act asa proxy or broker for placing trading orders 26 on trading platform 18.

Trading module 30 may manage and process trading orders 26 based atleast on trading management rules 36. Trading management rules 36 mayinclude rules defining how to handle locked and crossed markets,including locked and crossed markets between two or more market makers22. In some embodiments, trading management rules 36 generally providethat when an order is received from a second market maker 22 thatmatches or crosses an existing order from a first market maker 22, atrade between the two orders is not automatically executed between thetwo market makers 22. Instead, in the case of a crossing order, tradingmodule 30 automatically moves the price of the first order to match thecontra price of the second order to create a locked market between thetwo market makers 22. (A contra price for a bid is an offer price, whilea contra price for an offer is a bid price.) In addition, in the case ofeither a matching or crossing order by the second market maker 22, across timer is started. If the locked market still exists between thetwo market makers 22 when the timer expires, trading module 30automatically executes a trade between the two market makers 22 at thelocked price, which is the price most favorable to the first, passivemarket maker 22. Thus, if a market maker 22 has an existing, passiveorder that is crossed by an order from another market maker 22, thefirst market maker 22 has a period of time in which to move its order toavoid a trade being automatically executed with the other market maker22, which may be particularly advantageous in fast-moving markets.

In various embodiments, trading management rules 36 may include one,some or all of the following rules:

1. When a new price (i.e., a bid or offer price) is entered by a marketmaker that would cross an existing price placed by a customer, or viceversa, a trade may be executed to avoid a crossed market.

2. In certain embodiments, when a new price (i.e., a bid or offer price)is entered by a first market maker that would cross a contra pricepreviously placed by a second market maker: (1) the price entered by oneof the market makers is automatically moved to match the price enteredby the other market maker to create a locked market, and (2) a crosstimer (which may also be referred to as an auto-execute timer) isimplemented. In a particular embodiment, the price entered by the secondmarket maker is moved to match the price entered by the first marketmaker to create a locked market. If the locked market exists between thetwo market makers at the expiration of the cross timer, a trade may beauto-executed between the two market makers at the locked price.

As discussed above, for a “cash” price style instrument (i.e., aninstrument for which the bid price is typically numerically lower thanthe offer price), a newly entered bid price crosses an existing offerprice if the bid price is greater than the offer price, while a newlyentered offer price crosses an existing bid price if the offer price isless than the bid price. For example, suppose a first market makerplaces a bid-offer of 23-25 and a second market maker subsequentlyplaces a bid-offer of 20-21. The offer price submitted by the secondmarket maker (21) is less than the bid price previously submitted by thefirst market maker (23), and thus the second market maker's offer pricecrosses the first market maker's bid price. As a result, the firstmarket maker's bid price may be moved to 21 to match the newly submittedoffer price (such that the first market maker's bid-offer now stands at21-25) to avoid a crossed market between the first market maker and thesecond market maker, and a cross timer may be implemented.

3. In certain other embodiments, when a new price (i.e., a bid or offerprice) is entered by a first market maker that would cross a contraprice previously placed by a second market maker: (1) the price enteredby one of the market makers is automatically moved to match the priceentered by the other market maker to create a locked market, but (2) across timer is not implemented. In such embodiments, the locked marketmay remain locked until one or the market makers moves their price, acustomer trades on the locked price, or some other event causes thelocked market to become unlocked.

4. In still other embodiments, when a new price (i.e., a bid or offerprice) is entered by a first market maker that would cross a contraprice previously placed by a second market maker: (1) the price enteredby one of the market makers is automatically moved such that neither acrossed market nor a locked market exists, and (2) as a result ofneither a crossed market nor a locked market existing, a trade is notexecuted between the two market makers. For example, if the first marketmaker entered a bid that would cross an offer previously entered by asecond market maker, the price of the second market maker's offer may bemoved to a new price higher than the first market maker's bid such thattrade is not executed between the two market makers. Similarly, if thefirst market maker entered an offer that would cross a bid previouslyentered by a second market maker, the price of the second market maker'sbid may be moved to a new price lower than the first market maker'soffer such that trade is not executed between the two market makers. Insuch embodiments, a cross timer may not be implemented as there is nocrossed or locked market between the two market makers.

In some embodiments in which crossed prices are moved to prevent crossedor locked markets between market makers 22, crossed prices may be movedto a price that is one or more price ticks (or in some cases, one ormore integers or fractions of an integer) away from the crossing price.For example, in a market with a tick size of ¼ point, if a newly placedbid of 18½ crosses an existing offer of 18¼, the offer may beautomatically moved to 18¾, one price tick above the aggressive bid.

In some embodiments, crossed prices may be moved to a price that isslightly less than one price tick (or in some cases, one integer) awayfrom the crossing price. For example, in a market with a price tick sizeof 1 point, if a newly placed bid of 20 crosses an existing offer of 19,the offer may be automatically moved to 20.90 (rather than 21). In thisregard, in some embodiments, trading module 30 may employ any of thetechniques or concepts disclosed in U.S. patent application Ser. No.10/171,009 filed on Jun. 11, 2002 and entitled “Systems and Methods forProviding Price Improvement in Active Trading Market.”

5. In still other embodiments, when a new price (i.e., a bid or offerprice) is entered by a first market maker that would cross a contraprice previously placed by a second market maker: (1) the price enteredby the first market maker is placed on the market at that price, thuscreating an inverted (or crossed) market, and (2) a cross timer isimplemented. If the inverted market exists between the two market makersat the expiration of the cross timer, a trade may be auto-executedbetween the two market makers at the price entered by the first marketmaker, the price entered by the second market maker, or some price inbetween the two. In some embodiments, trading platform 18 may displaysuch crossed markets to customers. For example, if a first market makerplaces a bid-offer price spread of 12-14 and a second market makerplaces a bid-offer price spread of 15-17, a crossed market bid-offerprice spread of 15-14 may be displayed to customers. This display may beattractive for anyone trading on the instrument, and may in some tradingsystems even provide customers 24 possible arbitrage situations in whicha customer 24 may realize a profit by quickly trading on both sides ofthe bid-offer price spread.

6. In certain embodiments, when a new price (i.e., a bid or offer price)is entered by one market maker that matches a contra price previouslyplaced by another market maker, a locked market is created, and as aresult, a cross timer may be implemented. As discussed above, if thelocked market exists at the expiration of the cross timer, a trade maybe auto-executed between the two market makers at the locked price.

7. In certain other embodiments, when a new price (i.e., a bid or offerprice) is entered by one market maker that matches a contra pricepreviously placed by another market maker, one of the prices isautomatically moved such that neither a crossed market nor a lockedmarket exists. For example, if a bid is received from a first marketthat matches a previously placed offer from a second market maker, theprice of the second market maker's offer may be moved to a new pricehigher than the first market maker's bid such that trade is not executedbetween the two market makers. Similarly, if an offer is received from afirst market that matches a previously placed bid from a second marketmaker, the price of the second market maker's bid may be moved to a newprice lower than the first market maker's offer such that trade is notexecuted between the two market makers. In such embodiments, a crosstimer may not be implemented as there is no crossed or locked marketbetween the two market makers.

8. In some embodiments, trading platform 18 prevents displaying crossedmarkets to customers. For example, if a crossing bid or offer isreceived, trading platform 18 may not display the crossing bid or offeruntil a trade is executed (such as when an order submitted by a tradercrosses an order submitted from a market maker) or the crossed bid oroffer is moved to create a locked market with the crossing bid or offer(such as when an order submitted by one market maker crosses an ordersubmitted from another market maker). In some embodiments in whichinverted (or crossed) markets are permitted, trading platform 18 maydisplay inverted markets to customers (see Rule #4 above).

9. In some embodiments, auto-execute may be enabled. If auto-execute isenabled, crossed markets trigger an automatic trade, except crossedmarkets between market makers, which trigger various other rulesdiscussed herein.

10. In some embodiments in which a crossing price is automatically movedto create a locked market (for example, see Rule #2 above), when a newprice (a bid or offer price) is submitted by a second market maker thatwould cross a contra price previously placed by a first market maker,only the first market maker's price on the crossed side is moved to lock(i.e., match) the price newly entered by second market maker. The pricesubmitted by the second market maker that would cross the contra pricepreviously placed by a first market maker may be referred to as the“crossing price.”

(a) If only bids from market makers exist on the new locking side, anauto-execute timer may be started in order to delay the auto-execution.(b) If a customer's price exists before the crossing price is receivedfrom the second market maker and the customer's price locks with thecrossing price, a trade may be executed without delay (in other words,without being delayed by a timer) between the customer and the secondmarket maker at the locked price against everyone else, including thefirst market maker.(c) If a customer's price exists before the crossing price is receivedfrom the second market maker and the customer's price doesn't lock(i.e., is inverted) with the crossing price, an auto-execute timer maynot be started, but the crossing price (the aggressive price) may bepromoted to the customer's price and a trade may be auto-executedagainst the customer's price only on the passive side at the originalpassive price. For example, suppose a first market maker submits a bidat 18, then a customer submits a bid at 18, and then a second marketmaker submits an offer at 17. The first market maker's bid may be movedto 17 and a trade may be auto-executed between the customers bid and thesecond market makers offer at the price of 18, all without a cross timerbeing started.

11. In some embodiments, there can be only one outstanding auto-executetimer per instrument. In other embodiments, there may be more than oneoutstanding auto-execute timer for a particular instrument.

12. As discussed above, an auto-execute timer may be implemented in alocked market. In addition (or alternatively), in some embodiments, anauto-execute timer may be implemented in an inverted (or crossed) market(for example, see Rule #4 above).

13. The auto-execute timer may be cancelled if the locked market isremoved, such as when one of the prices underlying the locked/choicemarket is moved such that neither a locked market nor a crossed marketexists.

14. After the auto-execute timer elapses, the system may executeaggressively on behalf of the market maker crossing. In other words, thesystem may auto-execute a trade between the first market maker and thesecond market maker.

15. In some embodiments, if after a locked market is created between twomarket makers (such as due to the circumstances discussed in Rule #2,Rule #3, or Rule #6, for example), a customer's price is subsequentlyentered at the locked level, the system may auto-execute a trade againsteveryone (including market makers) on the passive side at that lockedprice.

In addition, in some embodiments, if a portion of the market maker'sorder that was auto-executed with the customer remains after the tradewith the customer, any pending auto-execute timer (if any) between thetwo market makers may be cancelled and a trade auto-executed between thetwo market makers. In a particular embodiment, the customer's order thatcatalyzed this trade will trade first before the trade between themarket makers. For example, suppose a locked market between a firstmarket maker's bid and a second market maker's offer at the price of 15,wherein the size of each of the lock bid and offer orders is 10,000.Thus, the locked market may be expressed as 15-15 (10,000×10,000). If acustomer enters an offer of size 3,000 at price 15, a trade of size3,000 may be auto-executed between the customer's offer (at price 15)and the first market maker's bid (at price 15). Thus, the existinglocked market may be expressed as 15-15 (7,000×10,000). As discussedabove, as a result of the auto-executed trade between the customer andthe first market maker, any pending auto-execute timer (if any) betweenthe first and second market makers may be cancelled and a tradeauto-executed between the second marker maker's offer and the remainingportion of the first market maker's bid (i.e., a trade of size 7,000 isauto-executed).

In other embodiments, if a portion of the market maker's order that wasauto-executed with the customer remains after the trade with thecustomer, any pending auto-execute timer (if any) between the two marketmakers may remain in progress (or in some embodiments, is restarted). Ifthe locked market exists between the two market makers at the expirationof the cross timer, a trade may then be auto-executed between the twomarket makers at the locked price. Alternatively, in an embodiment inwhich a timer is not implemented for a locked market (for example, seeRule #6), the locked market between the two market makers may remainlocked until one or the market makers moves their price, a customertrades on the locked price, or some other event causes the locked marketto become unlocked.

16. In some embodiments, any new crossing price from a market maker willcancel any pending auto-execute timer, and start a new auto-executetimer.

17. In some embodiments, customer and market maker prices entered at thetrading price during a trade may be elevated to aggressive buy or sellorders, and join in the trade.

18. In some embodiments, a trade (buy or sell) between a customer and amarket maker that would naturally take place may cancel any pendingauto-execute timer. For example, suppose a first market maker submits abid-offer order at 18-20, and a second market maker submits a bid-offerorder at 15-17. The first market maker's bid may be automaticallyreduced to 17 to match the second market maker's offer (according toRule #1), which creates a locked market at 17, and a cross-timer may beimplemented. If before the cross-timer has expired, a customer submits abid at 18 (which would naturally trigger a trade between the customerand the second market maker), the cross-timer may be cancelled and atrade auto-executed between the customer and the second market maker atthe locked price of 17.

19. In some embodiments, the sequencing of existing orders may bemaintained during a market maker price movement (either up or down) as aresult of crossed markets. If two or more existing market makersame-side prices are to be moved and re-entered due to a crossing contraprice received from another market maker, each of the existing marketmaker orders is moved in price order, and then in time order (for ordersat the same price). Each newly moved market maker order may then begiven a new timestamp as it is moved to keep the previous ordersequence. Existing customer limit orders may not be pushed down a bid oroffer sequence in favor of a newly moved market maker order, by virtueof their older timestamps keeping them in front of any market makerprices newly moved to the same price level. Newly moved market makerorders may alternatively be re-ordered as they are moved (with the mostaggressive market maker order—e.g., the highest bid or the lowest offerfor a normally-priced instrument such as a stock—receiving its newtimestamp first), and placed below any orders existing already at theprice to which the newly moved market maker were moved.

20. Since market makers may believe they are, or intend to be, alwayspassive, market maker API accounts may be set up such that the brokeragefees for all market maker transactions (both passive and aggressive) arethe same.

21. In some embodiments, the cross timer may be dynamically adjustableto account for market volatility.

22. The length of the cross timer used for different instruments maydiffer, and may be based on one or more parameters associated with theinstrument, such as the volatility, current price, or average tradingvolume associated with that instrument, for example. In someembodiments, trading module 30 may determine an appropriate length forcross timers for different instruments based on such parameters. Inaddition, the cross timer for each instrument may be independentlyadjusted. For example, trading module 30 may increase the length of thecross timer for a particularly volatile instrument automatically inresponse to data regarding the volatility of the instrument, or inresponse to feedback from market makers 22 wishing to increase the delayfor adjusting their trading orders 26 for that instrument.

23. As discussed above, in some embodiments, a multi-tiered system ofmarket makers 22 is employed. In such embodiments, market makers 22 arecategorized into different levels or tiers that affect the way in whichsuch market makers 22 are treated by trading module 30. Each marketmaker 22 may be classified according to one or more criteria, such aswhether the market maker 22 is an electronic feed or a human trader, andwhether the market maker 22 is a strong trader, or has particular orsuperior information pertaining to the trading flows of one or moreparticular instruments. In some embodiments, market makers 22 arecategorized into different levels or tiers for different tradableinstruments.

In multi-tiered embodiments, trading management rules 36 may be designedto protect particular categories of market makers 22 from othercategories of market makers 22. For example, rules 36 may be designed toprotect electronic feed market makers 22 or other market makers 22 notregarded as having superior information on a particular instrument frommarket makers 22 that are regarded as having access to superiorinformation regarding the particular instrument.

In a particular embodiment, there are two levels of market makers 22:(1) electronic market makers (MMe) and (2) manual market makers (MMm).In some embodiments, MMe's may include electronic feeds, MMm's mayinclude traders for a market maker firm having exposure to particularinformation or trading flows in one or more particular instruments, andcustomers 24 may include non-market maker (customer) traders. Eachmarket maker 22 may be classified either an MMe or an MMm for differenttypes of instruments. In one embodiment, if a market maker 22 is astrong trader, or is known to often have superior information, in one ormore particular instruments, that market maker 22 is classified as anMMm in such instrument(s) and as an MMe in all other instruments. Forinstance, a Canadian bank may be classified as an MMm for any instrumentbased on the Canadian dollar or its exchange rate, and classified as anMMe for all other instruments.

In this particular embodiment, in a market of a particular instrument,rules 36 protect MMe's for that instrument from MMm's for thatinstrument. In particular, the following rules may apply:

(A) If an MMm's price matches or crosses an existing MMe price, one ormore of the various rules discussed above may apply to prevent anauto-executed trade between the MMm and MMe. For example, if anaggressive (e.g., newly placed or moved) MMm price matches or crosses apassive (e.g., previously existing) MMe's price, one of (although notlimited to) the following rules may be triggered:

(i) if the MMs's price crosses the existing MMe price, the crossed MMeprice may be moved to match the MMm price, a cross timer is started, anda trade is auto-executed between the MMe and the MMm only if the lockedmarket between MMe and MMm remains locked when the cross timer expires(for example, see Rule #2);

(ii) if the MMs's price crosses the existing MMe price, the crossed MMeprice may be moved to match the MMm price, no cross timer is started,and the market between the MMe and the MMm remains locked until the MMeor the MMm moves their price, the locked market gets traded on byanother trader, or some other event occurs that unlocks the marketbetween MMe and MMm (for example, see Rule #3);

(iii) if the MMs's price matches or crosses the existing MMe price, thematched or crossed MMe price may be moved out of the way of the MMmprice such that there is no locked or crossed market between the MMe andthe MMm, and no cross timer is implemented (for example, see Rule #4);or

(iv) if the MMs's price matches or crosses the existing MMe price, theMMm's matching or crossing price may be placed on the market, thuscreating a locked market or an inverted (or crossed) market between theMMm and the MMe, whereby a cross timer is started, and a trade isauto-executed between the MMe and the MMm only if the MMe and the MMmprovided market remains locked or inverted when the cross timer expires(for example, see Rule #5).

In this manner, trading module 30 may protect MMe prices from being “runover” by MMm's that have inside or superior information regardingtrading flows of particular instruments.

(B) If a second MMm's price matches or crosses an first MMm's previouslyexisting price, the second MMm's price may be treated as a passivecustomer's price and thus a trade may be auto-executed between the firstand second MMm's (without a cross timer being implemented).

(C) If an MMe's price matches or crosses an existing MMm price, the MMmprice may be treated as a passive customer's price and thus a trade maybe auto-executed between the MMe and MMm (without a cross timer beingimplemented). In other words, the system assumes that when an MMe pricecrosses an existing MMm price, the MMm wants to make the trade at thatprice and thus the MMm need not be protected (e.g., by using a crosstimer or other techniques discussed above) against an auto-executedtrade.

(D) If a second MMe's price matches or crosses a first MMe's previouslyexisting price, one or more of the various rules discussed above (forexample, rules (i)-(iv) discussed above) may be triggered to prevent anauto-executed trade between the two MMe prices.

To illustrate the operation of this particular embodiment, a fewexamples are presented as follows.

Example 1 MMm Price Crosses an Existing MMe Price

(system configured to automatically move crossed prices to create alocked market with the crossing price—see Rule #2 above)

-   a) MMe₁ enters bid-offer spread: 10-12 (10×10)-   b) MMe₂ enters bid-offer spread: 10-12 (5×5)-   System will display: 10-12 (15×15)-   c) MMm enters bid: 20-(10×)-   System will display: 20-20 (10×15) and cross timer started-    10-(15×)

Result: if MMm's and MMe's prices remain locked when the cross timerexpires, the system would be configured to auto-execute a trade betweenMMm and MMe₁ at 20 (size=10).

Example 2 MMe Price Crosses an Existing MMm Price

(system configured to automatically move crossed prices to create alocked market with the crossing price—see Rule #2 above)

-   a) MMe enters bid-offer spread: 10-12 (10×10)-   System configured to display: 10-12 (10×10)-   b) MMm enters bid: 08-(10×)-   c) Same MMe re-enters new bid-offer spread: 06-08 (10×10)    Result: system would be configured to auto-execute a trade between    MMm and MMe at 08 (size=10), without implementing a cross timer.

Example 3 MMe Crosses an Existing MMm

(system configured to automatically move crossed prices to create alocked market with the crossing price—see Rule #2 above)

-   a) MMe enters bid-offer spread: 10-12 (10×10)-   b) MMm enters bid: 11-(5×)-   System configured to display: 11-12 (15×10)-   c) Same MMe re-enters new bid-offer spread: 06-08 (10×10)    Result: system would be configured to auto-execute a trade between    MMm and MMe at 11 (size=5), without implementing a cross timer.

Example 4 MMm Price Crosses an Existing MMe Price

(system configured to automatically move crossed prices to create alocked market with the crossing price—see Rule #2 above)

-   a) MMe₁ enters bid-offer spread: 10-12 (10×10)-   b) MMe₂ enters bid-offer spread: 07-09 (10×10)-   System configured to display: 09-09 (10×10)-    07-12 (10×10)-   c) MMm enters offer: −07 (×5)-   System configured to display: 07-07 (15×5) and timer started-    −09 (×10)-    −12 (×10)    Result: if MMm's and MMe₁'s prices remain locked when the cross    timer expires, the system would be configured to auto-execute a    trade between MMm and MMe₁ at 07 (size=5).

Example 5 MMm Price Crosses an Existing MMe Price

(system configured to automatically move crossed prices out of the wayto avoid a crossed or locked market—see Rule #4 above)

-   a) MMe₁ enters bid-offer spread: 10-12 (10×10)-   b) MMe₂ enters bid-offer spread: 10-12 (5×5)-   System will display: 10-12 (15×15)-   c) MMm enters bid: 20-(10×)-   System configured to display: 20-21 (10×15), no cross timer started-    10-(15×)

It should be understood that in any such embodiments that employ amulti-tiered system of market makers 22, any one or more other tradingmanagement rules 36 previously discussed (in any combination) make alsoapply in order for trading module 30 to manage trading orders 26received from various market makers 22 and/or customers 24.

It should also be understood that set of trading management rules 36listed above apply to particular embodiments and that in variousembodiments, the trading management rules 36 applied by trading module30 may include any number of the rules listed above, additional rules(one or more of which may be alternatives or modifications of any of therules listed above), or any combination thereof. For example, in aparticular embodiment, the set of trading management rules 36 applied bytrading module 30 includes Rules #1, #2, #6, #8, #9, #10, #13, #14, #15,#18, #21 and #22. In another example, embodiment, the set of tradingmanagement rules 36 applied by trading module 30 includes Rules #1, #4,#7, #8, #9, #19, #20 and #23.

In addition, it should be understood that in some embodiments, thetrading management rules 36 applied by trading module 30 may be equallyor similarly applied to numerically-inverted instruments in which bidsare higher in price (although lower in value) than corresponding offers.For example, bonds (such as US Treasury “when-issued” bills, forexample) are typically numerically-inverted instruments because bondprices are typically inversely related to bond yields. In other words,the going bid price of a bond is numerically higher than the going offerprice for the bond.

FIGS. 2 through 6 illustrate example methods for handling trading ordersin a variety of situations using trading system 10, including applyingvarious trading management rules 36 discussed above. FIG. 2 illustratesa method of handling a crossing offer received from a customer 24according to one embodiment of the invention. At step 100, variousorders 22, including bid and offer (or ask) orders, are received for aparticular instrument 24, thus establishing a market for that instrument24. Such orders 22 may be received by both market makers 22 andcustomers 24. At step 102, a first market maker 22, MM1, submits abid-offer price spread for instrument 24 to trading platform 18. At step104, a customer 24 places an offer order which crosses the bid pricesubmitted by MM1. At step 106, trading module 30 auto-executes thecustomer's 28 offer against all existing bids, including MM1's bid, atthe best price for the customer 24. At step 108, trading may continue.It should be understood that the method of FIG. 2 may be similarlyapplied to handle a crossing bid received from a customer 24, such aswhere a customer 24 places an bid order which crosses the offer pricesubmitted by a market maker 22.

To better understand the method shown in FIG. 2, suppose MM1 submits abid-offer price spread of 12-14 (of sizes 5 by 5) for a stock at step102. At step 104, a customer places an offer order at a price of 11 (ofsize 5) for the stock, which crosses the bid price (12) submitted byMM1. At step 106, trading module 30 auto-executes the customer's offeragainst all existing bids, including MM1's bid of 12, at the best pricefor the customer. Assuming MM1's bid of 12 is the highest existing bidfor the stock, trading module 30 auto-executes a trade of 5 sharesbetween the customer and MM1 at a price of 12.

FIG. 3 illustrates a method of handling a crossing offer received from amarket maker 22 assuming the bid side contains both market makers 22 andcustomers 24, according to one embodiment of the invention. At step 120,various orders 22, including bid and offer orders, are received for aparticular instrument 24, thus establishing a market for that instrument24. Such orders 22 may be received by both market makers 22 andcustomers 24. At step 122, a first market maker 22, MM1, submits abid-offer price spread for instrument 24 to trading platform 18. At step124, a customer 24 places a bid for instrument 24 that does not cross ormatch any current offer, and thus does not trigger a trade. At step 126,a second market maker 22, MM2, submits a bid-offer price spread forinstrument 24 including an offer which crosses MM1's bid price.

At step 128, trading module 30 determines whether to cancel MM1's bid.In one embodiment, trading module 30 cancels MM1's bid if (a) the bid isnot a limit bid and (b) moving the bid to match MM2's offer price wouldmove the bid below another existing bid. If trading module 30 determinesto cancel MM1's bid, the bid is cancelled at step 130. Alternatively, iftrading module 30 determines not to cancel MM1's bid, MM1's bid is movedto match MM2's offer price at step 132 to prevent a cross market betweenMM1 and MM2. At step 134, trading module 30 auto-executes MM2's offeragainst all existing bids, excluding MM1's moved bid, at the best pricefor MM2. MM2's offer may be auto-executed against customers' bids, aswell as bids received from market makers if (a) MM2's offer matched theprice of such market maker bids and (b) customers' bids are alsopresent.

At step 136, it is determined whether all of MM2's offer was traded atstep 134. If so, the method stops. However, if any portion of MM2'soffer remains after the executed trade(s) at step 134, a cross timerstarts for MM1's moved bid at step 138. At step 140, the cross timerruns. If MM1's moved bid and the remaining portion of MM2's offer remainlocked when the cross timer expires, the remaining portion of MM2'soffer is auto-executed with MM1's moved bid at step 142. Alternatively,any of a variety of events may cause the locked relationship betweenMM1's moved bid and MM2's offer to terminate before the cross timerexpires, such as MM1 moving its bid price, MM2 moving its offer, MM2'soffer being matched and executed by another bid, or MM1's bid or MM2'soffer being withdrawn, for example. Such situations are discussed inmore detail below with reference to FIG. 4. It should be understood thatthe method of FIG. 3 may be similarly applied to handle a crossing bidreceived from a market maker 22, such as where a market maker 22 placesan bid order which crosses the offer price previously submitted byanother market maker 22.

To better understand the method shown in FIG. 3, suppose MM1 submits abid-offer price spread of 35-37 (of sizes 5 by 10) for a stock at step122. At step 124, a customer places a bid order for the stock at a priceof 35 (of size 5) that does not cross or match any current offer, andthus does not trigger a trade. At step 126, MM2 submits a bid-offerprice spread of 32-33 (of sizes 8 by 10) for the stock. MM2's offerprice of 33 crosses MM1's bid price of 35.

Assume that at step 128, trading module 30 determines not to cancelMM1's bid. Thus, at step 132, MM1's bid is reduced from 35 to 33 tomatch MM2's offer price of 33. At step 134, trading module 30auto-executes MM2's offer at 33 against all existing bids, excludingMM1's moved bid, at the best price for MM2. Assuming that the customer'sbid at 35 is the highest existing bid price, trading module 30auto-executes a trade at a price of 35 between 5 of the 10 sharesoffered by MM2's offer and the bid for 5 shares by the customer. MM2'sexisting bid-offer now reads 32-33 (of sizes 8 by 5). At step 136, it isdetermined that a portion of MM2's offer—namely, 5 shares—remains afterthe executed trade at step 134, and thus a cross timer starts for MM1'smoved bid (price=33) at step 138. At step 140, the cross timer runs. IfMM1's moved bid (price=33) and the remaining portion of MM2's offer(price=33) remain locked when the cross timer expires, the remaining 5shares of MM2's offer is auto-executed with the 5 shares of MM1's movedbid at the price of 33 at step 142. Alternatively, if the lockedrelationship between MM1's moved bid and MM2's offer terminated beforethe cross timer expired, various consequences may occur, as discussed inmore detail below with reference to FIG. 4B.

FIGS. 4A-4B illustrate a method of handling a crossing offer receivedfrom a market maker 22 assuming the bid side contains only market makers22, according to one embodiment of the invention. As shown in FIG. 4A,at step 160, various orders 22, including bid and offer orders, arereceived from one or more market makers 22 for a particular instrument24, thus establishing a market for that instrument 24. At step 162, afirst market maker 22, MM1, submits a bid-offer price spread forinstrument 24 to trading platform 18. At step 164, a second market maker22, MM2, submits a bid-offer price spread for instrument 24 including anoffer which crosses MM1's bid price. At step 166, trading module 30moves MM1's bid price to match MM2's offer price to prevent a crossmarket between MM1 and MM2. At step 168, trading module 30 publishesMM1's newly moved bid in the market data. Thus, trading module 30 mayavoid publishing a crossed market. At step 170, trading module 30 startsa cross timer for MM1's newly moved bid.

At step 172, the cross timer runs. For the duration of the cross timer,MM1's bid can only be traded against an offer from a customer, notanother market maker, including MM2. If MM1's moved bid and theremaining portion of MM2's offer remain locked when the cross timerexpires, MM2's offer is auto-executed with MM1's moved bid at step 174.Alternatively, any of a variety of events may cause the lockedrelationship between MM1's moved bid and MM2's offer to terminate beforethe cross timer expires, such as MM1 moving its bid price, MM2 movingits offer, MM2's offer being matched and executed by another bid, orMM1's bid or MM2's offer being withdrawn, for example. Such situationsare shown in FIG. 4B and discussed below with reference to steps 176through 204.

First, suppose MM1's bid is moved down (either by MM1 or otherwise)during the duration of the cross timer at step 176 such that MM1's bidand MM2's offer are neither crossed nor locked. In response, the crosstimer is terminated at step 178 and the new bid price is published tothe market at 180.

Second, suppose MM1's bid is moved up (either by MM1 or otherwise)during the duration of the cross timer (such as during re-aging) at step182. In response, trading module 30 moves MM2's offer to match MM1'snewly increased bid at step 184, and the cross timer is restarted forMM1's bid at this new locked price at step 186. Thus, the method mayreturn to step 172.

Third, suppose a third market maker 22, MM3,submits a better crossingoffer than MM2's offer during the duration of the cross timer at step188. In other words, MM3's offer is at a lower price than MM2's offer.In response to MM3's offer, trading module 30 further reduces MM1's bidto match MM3's offer price at step 190, and cancel the running crosstimer and start a new cross timer for MM1's newly reduced bid at step192. Thus, the method may return to step 172.

Fourth, suppose at step 194, MM2 withdraws it's crossing offer which wasplaced at step 164, or amends the offer to a higher price, during theduration of the cross timer. In response, MM1's bid remains constant atstep 196, and the cross timer for MM1's bid is terminated at step 198. A“normal” (i.e., not crossed or locked) bid-offer state now exists.

Fifth, suppose at step 200, a customer 24 submits an offer that crossesMM1's bid, or moves an existing offer to a price that crosses MM1's bid,during the duration of the cross timer. This situation may be handled inseveral different ways, depending on the particular embodiment. In oneembodiment, shown at step 202A, trading module 30 first executes a tradebetween the customer's offer and MM1's bid at the locked price, and thenexecutes a trade between remaining shares (if any) of MM1's bid andMM2's offer at the locked price without waiting for the cross timer toexpire.

In another embodiment, shown at step 202B, trading module 30 executes atrade between the customer's offer and MM1's bid and restarts the crosstimer for any remaining shares of MM1's bid, if any. Thus, the methodmay return to step 172. In yet another embodiment, shown at step 202C,trading module 30 executes a trade between the customer's offer andMM1's and the cross timer for any remaining shares of MM1's bid, if any,continues to run (i.e., the cross timer is not reset).

Sixth, suppose at step 204, a third market maker 22, MM3, submits a bidduring the duration of the cross timer that crosses (i.e., is higherthan) the locked price of MM1's bid and MM2's offer. In response,trading module 30 moves MM2's offer to match MM3's bid price at step206, and restarts a cross timer for MM2's offer at step 208.

As discussed with regard to the methods of FIGS. 2 and 3, it should beunderstood that the method of FIG. 4 may be similarly applied whetherthe crossing order is a bid or an offer. In particular, the method ofFIG. 4 may be similarly applied to handle a crossing bid received from amarket maker 22 where the offer side contains only market makers 22.

To better understand the method shown in FIG. 4, suppose MM1 submits abid-offer price spread of 12-14 (of sizes 10 by 10) for a stock at step162. At step 164, MM2 submits a bid-offer price spread of 9-11 (of sizes5 by 5) for the stock. MM2's offer price of 11 thus crosses MM1's bidprice of 12. At step 166, trading module 30 moves MM1's bid price from12 to 11 to match MM2's offer price to prevent a cross market betweenMM1 and MM2. At step 168, trading module 30 starts a cross timer forMM1's bid at the price of 11. At step 170, trading module 30 publishesMM1's newly moved bid such that the published bid-offer spread is 11-11.

At step 172, the cross timer runs. If MM1's moved bid and the remainingportion of MM2's offer remain locked when the cross timer expires, MM2'soffer is traded with MM1's moved bid at the price of 11 at step 174.Alternatively, as discussed above, any of a variety of events may causethe locked relationship between MM1's moved bid and MM2's offer toterminate before the cross timer expires.

First, suppose MM1 moves its bid price down from 11 to 10 at step 176such that MM1's bid (at 10) and MM2's offer (at 11) are no longercrossed nor locked. In response, the cross timer is terminated at step178 and MM1's new bid price of 10 is published to the market at 180.

Second, suppose MM1's bid price is moved up from 11 to 12 at step 182.In response, trading module 30 moves MM2's offer price from 11 to 12 tomatch MM1's newly increased bid at step 184, and the cross timer isrestarted at this new locked price at step 186. Thus, the method mayreturn to step 172.

Third, suppose at step 188, MM3submits a crossing offer at the price of10, which betters MM2's offer at 11. In response, trading module 30reduces MM1's bid from 11 to 10 to match MM3's offer price at step 190.Trading module 30 then cancels the running cross timer and starts a newcross timer for MM1's newly reduced bid at the price of 10 at step 192.Thus, the method may return to step 172.

Fourth, suppose at step 194, MM2 withdraws it's crossing offer (at theprice of 11) which was placed at step 164, or amends the offer from 11to 12. In response, MM1's bid remains constant at 11 at step 196, andthe cross timer for MM1's bid is terminated at step 198. A “normal”(i.e., not crossed or locked) bid-offer state now exists.

Fifth, suppose at step 200, a customer 24 submits an offer of 5 sharesat the price of 9, which crosses MM1's bid at 11. As discussed above,this situation may be handled differently depending on the particularembodiment. In the embodiment shown at step 202A, trading module 30first executes a trade between the 5 shares of the customer's offer and5 of the 10 shares of MM1's bid at the locked price of 11, and thenexecutes a trade between the remaining 5 shares of MM1's bid and the 5shares of MM2's offer at the locked price of 11 without waiting for thecross timer to expire. In the embodiment shown at step 202B, tradingmodule 30 executes a trade between the 5 shares of the customer's offerand 5 of the 10 shares of MM1's bid at the locked price of 11, andresets the cross timer for the remaining 5 shares of MM1's bid. In theembodiment shown at step 202C, trading module 30 executes a tradebetween the 5 shares of the customer's offer and 5 of the 10 shares ofMM1's bid at the locked price of 11, and the cross timer for MM1's bidcontinues to run for the remaining 5 shares of MM1's bid.

Sixth, suppose at step 204, MM3 submits a bid at the price of 12, whichcrosses (i.e., is higher than) the locked price of MM1's bid and MM2'soffer at 11. In response, trading module 30 moves MM2's offer (as wellas any other market maker offers at the locked price) to 12 to matchMM3's bid price at step 206, and restarts a cross timer for MM2's offerat step 208.

FIG. 5 illustrates a method of handling a crossing offer received from amarket maker 22 by moving the crossed bid received from another marketmaker 22 to prevent a crossed or locked market according to anotherembodiment of the invention. At step 300, various orders 22, includingbid and offer orders, are received from one or more market makers 22 fora particular instrument 24, thus establishing a market for thatinstrument 24. At step 302, a first market maker 22, MM1, submits abid-offer price spread for instrument 24 to trading platform 18. At step304, a second market maker 22, MM2, submits a bid-offer price spread forinstrument 24 including an offer which matches or crosses MM1's bidprice. At step 306, trading module 30 automatically moves MM1's bidprice to a new price lower than MM2's offer price to prevent a locked orcrossed market between MM1 and MM2. At step 308, trading module 30publishes MM1's newly moved bid in the market data. Since MM1's bidprice is moved such that there is no locked or crossed market betweenMM1 and MM2, trading module 30 does not start a cross timer for MM1 andMM2.

Any of a variety of events may occur next. For example, at step 310, athird market maker 22, MM3,submits a bid-offer price spread forinstrument 24 including an offer which matches or crosses MM1'spreviously-lowered bid price. At step 312, trading module 30 mayautomatically move MM1's previously-lowered bid price to a new pricelower than MM3's offer price to prevent a locked or crossed marketbetween MM1 and MM3. At step 314, trading module 30 publishes MM1'snewly moved bid in the market data.

As another example, at step 316, MM1 moves his lowered bid price tomatch (or exceed) MM2's offer price to create a locked or crossedmarket. At step 318, as a result of MM1 moving his lowered bid price tomatch (or exceed) MM2's offer price, trading module 30 may automaticallyexecute a trade between MM1 and MM2 at MM2's offer price.

As discussed with regard to the methods of FIGS. 2-4, it should beunderstood that the method of FIG. 5 may be similarly applied whetherthe crossing order is a bid or an offer. In particular, the method ofFIG. 5 may be similarly applied to handle a crossing bid received from amarket maker 22.

To better understand the method shown in FIG. 5, suppose MM1 submits abid-offer price spread of 12-14 (of sizes 10 by 10) for a stock at step302. At step 304, MM2 submits a bid-offer price spread of 8-11 (of sizes5 by 5) for the stock. MM2's offer price of 11 thus crosses MM1's bidprice of 12. At step 306, trading module 30 automatically moves MM1'sbid price from 12 to 10 (or some other price lower than 11, which pricemay or may not be a whole number) to prevent a locked or crossed marketbetween MM1 and MM2. At step 308, trading module 30 publishes MM1'snewly moved bid such that the published bid-offer spread is 10-11.

At step 310, a third market maker 22, MM3, submits a bid-offer pricespread of 7-9 (of sizes 5 by 5) for the stock instrument. MM3's offerprice of 9 thus crosses MM1's previously-reduced bid price of 10. Atstep 312, trading module 30 automatically moves MM1's previously-reducedbid price from 10 to 8 (or some other price lower than 9, which pricemay or may not be a whole number) to prevent a locked or crossed marketbetween MM1 and MM3. At step 314, trading module 30 publishes MM1'snewly moved bid such that the published bid-offer spread is 9-11.

At step 316, MM1 moves his lowered bid price of 10 back to 11 to matchMM2's offer price of 11. As a result, at step 318, trading module 30 mayautomatically execute a trade between MM1 and MM2 at the price of 11.

FIG. 6 illustrates another method of handling a crossing offer receivedfrom a market maker 22 by moving the crossed bid received from anothermarket maker 22 according to another embodiment of the invention. Atstep 350, various orders 22, including bid and offer orders, arereceived from one or more market makers 22 and/or customers 24 for aparticular instrument 24, thus establishing a market for that instrument24. At step 352, a first market maker 22, MM1, submits a bid-offer pricespread for instrument 24 to trading platform 18. At step 354, a customer24 submits a bid order for instrument 24 to trading platform 18 thatdoes not cross or match any existing offers on the trading platform 18.For example, customer's bid price may be lower than or equal to the bidprice of MM1's bid-offer price spread. At step 356, a second marketmaker 22, MM2, submits a bid-offer price spread for instrument 24including an offer price which matches or crosses both (a) MM1's bidprice and (b) the customer's bid price.

At step 358, as a result of MM2's offer price matching or crossing MM1'sbid price, trading module 30 automatically moves MM1's bid price to anew price lower than MM2's offer price to prevent a locked or crossmarket between MM1 and MM2. However, although MM2's offer price matchesor crosses the customer's bid price, trading module 30 does not move thecustomer's bid price. At step 360, since MM2's offer and the customer'sbid are locked or crossed, trading module 30 may auto-execute a tradebetween MM2's offer and the customer's bid.

At step 362, it is determined whether all of MM2's offer was traded atstep 360. If so, the method stops. However, if any portion of MM2'soffer remains after the executed trade with the customer's bid at step360, at step 364, trading module 30 may publish a bid-offer spreadbetween the MM1's lowered bid price and the offer price for theremaining portion of MM2's offer and trading may continue.

As discussed with regard to the methods of FIGS. 2-5, it should beunderstood that the method of FIG. 6 may be similarly applied whetherthe crossing order is a bid or an offer. In particular, the method ofFIG. 6 may be similarly applied to handle a crossing bid received from amarket maker 22.

To better understand the method shown in FIG. 6, suppose MM1 submits abid-offer price spread of 12-14 (of sizes 10 by 10) for a stock at step352. At step 354, customer 24 submits a bid price of 11 (of size 5) forthe stock. At step 356, MM2 submits a bid-offer price spread of 8-11 (ofsizes 10 by 10) for the stock. MM2's offer price of 11 thus crossesMM1's bid price of 12 and matches the customer's bid price of 11. Atstep 358, as a result of MM2's offer price of 11 crossing MM1's bidprice of 12, trading module 30 automatically moves MM1's bid price from12 to 10 to prevent a locked or cross market between MM1 and MM2.However, although MM2's offer price of 11 matches the customer's bidprice of 11, trading module 30 does not move the customer's bid price.At step 360, trading module 30 may auto-execute a trade of 5 sharesbetween MM2's offer and the customer's bid at the price of 15.

At step 362, it is determined that 5 shares of MM2's offer remainuntraded after the trade was executed at step 360. Thus, at step 364,trading module 30 may publish a bid-offer spread between the MM1'slowered bid price of 10 (10 shares) and the offer price 11 for theremaining portion of MM2's offer (5 shares) and trading may continue.Thus, trading module 30 may publish a bid-offer price spread of 10-11(of sizes 10 by 5) and trading may continue.

Modifications, additions, or omissions may be made to any of the methodsdiscussed above (including those discussed with reference to FIGS. 2-6)without departing from the scope of the invention. Additionally, stepsmay be performed in any suitable order without departing from the scopeof the invention.

Although an embodiment of the invention and its advantages are describedin detail, a person skilled in the art could make various alterations,additions, and omissions without departing from the spirit and scope ofthe present invention as defined by the appended claims.

1-128. (canceled)
 129. A method comprising: receiving, via a processoron an electronic exchange from a first market maker, a first order for afinancial instrument, in which the first market maker is located on adevice that is remote to the electronic exchange; after a delay,receiving, via the processor on the electronic exchange from a secondmarket maker, a second order that matches the first order, in which thedelay is due to a latency within the electronic exchange, in which thesecond market maker is located on a device that is remote to theexchange; in response to receiving the second order that matches thefirst order, automatically adjusting, via the processor, a price of thefirst order based on a set of rules, in which the set of rules isdetermined in advance of the electronic exchange receiving any orders,in which the first market maker and the second market maker are inelectronic communication with the processor over a network.
 130. Themethod of claim 129, in which the set of rules further comprises:determining that the second order offering a bid price that is higherthan or equal to an offer price of the first order; and in response tothe determination, triggering a command to prevent a match between thefirst order and the second order.
 131. The method of claim 130, in whichthe command to prevent the match between the first order and the secondorder comprises: increasing the offer price of the first order to exceedthe bid price of the second order.
 132. The method of claim 129, inwhich the set of rules further comprises: determining that the delay hascaused the price of the first order and a price of the second order nolonger be accurate; and in response to the determination, triggering acommand to prevent a match between the first order and the second order.133. The method of claim 129, in which the set of rules furthercomprises: determining that the second order has an offer price that islower than or equal to a bid price of the first order; and in responseto the determination, triggering a command to prevent a match betweenthe first order and the second order.
 134. The method of claim 133, inwhich the command to prevent the match between the first order and thesecond order comprises: decreasing the bid price of the first order tobe lower than the offer price of the second order.
 135. The method ofclaim 129, in which the set of rules further comprises: determining thatthe second market maker belongs to a category of market makers that areto be avoided; and in response to the determination, triggering acommand to prevent a match between the first order and the second order.136. The method of claim 135, in which the category comprises electronicfeeds.
 137. The method of claim 129 further comprising: receiving, froma third market maker, a third order that matches the first order. 138.The method of 137 further comprising: determining that the third marketmaker belongs to a category in which a match is permissible; and inresponse to the determination, triggering a command to execute a tradebetween the first order and the third order.
 139. The method of claim138, in which the category comprises human traders.
 140. The method ofclaim 137 further comprising: in response to receiving the third order,triggering a timer to begin, in which the timer expires after a periodof time that has been determined in advance of the electronic exchangereceiving any orders; and receiving, before the period of time hasexpired, a request from the first market maker to adjust the price ofthe first order in order to avoid executing a trade between the firstorder and the third order.
 141. An apparatus comprising: a processor onan electronic exchange; and a memory, in which the memory storesinstructions which, when executed by the processor, direct the processorto: receive, from a first market maker, a first order for a financialinstrument, in which the first market maker is located on a device thatis remote to the electronic exchange; after a delay, receiving, from asecond market maker, a second order that matches the first order, inwhich the delay is due to a latency within the electronic exchange, inwhich the second market maker is located on a device that is remote tothe exchange; in response to receiving the second order that matches thefirst order, automatically adjust a price of the first order based on aset of rules, in which the set of rules is determined in advance of theelectronic exchange receiving any orders, in which the first marketmaker and the second market maker are in electronic communication withthe processor over a network.
 142. An article of manufacture comprising:a computer-readable medium, in which the computer-readable medium isnon-transitory and stores instructions which, when executed by aprocessor, direct the processor to: receive, from a first market maker,a first order for a financial instrument, in which the first marketmaker is located on a device that is remote to the electronic exchange;after a delay, receiving, from a second market maker, a second orderthat matches the first order, in which the delay is due to a latencywithin the electronic exchange, in which the second market maker islocated on a device that is remote to the exchange; in response toreceiving the second order that matches the first order, automaticallyadjust a price of the first order based on a set of rules, in which theset of rules is determined in advance of the electronic exchangereceiving any orders, in which the first market maker and the secondmarket maker are in electronic communication with the processor over anetwork.